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Trade War Bump

By Simon Angelo

Investing is like a lot of things in life.  You push forward, make some progress, make some gains - and then the weather changes and you slip back.  Over the long term, keep going and you keep gaining.  Along the way, you've got to navigate the dips - and defend against them.

Toward the end of this month, most stocks pulled down heavily.  There were a couple that jumped - I'll tell you about those in a moment.  But overall our composite portfolio pulled down -0.44%.*

The defensive strategy assisted a lot this month - with dividend payments offsetting much of the falls.  And we took the opportunity to buy some new positions at good prices.

Trade war wobbles

The key reason for the drawdown in stocks, particularly in America, is the Trump led US v. China trade war.

Trump has fair reason.  The Chinese economy was swallowing more and more factory capacity, to the point where America was threatened with mass deindustrialisation and wholesale job loss.

I saw the impacts of that first hand.  A friend of mine had a small factory producing a useful home appliance in south Auckland.  He employed workers on a production line.  But he couldn't compete with the few hundred dollars paid to Chinese factory workers for a whole month of work - many of whom slept on site in 8-to-a-room dormitories.

Workers' dormitory at the Wah Tung toy factory, China.  Source: CNBC
Earlier in the month it seemed the US could win the trade war by virtue of being the much larger player on the import side.  Negotiations could be had.  A trade deal reached.

Then China dug in its toes.  And fired a series of less than subtle warnings that it would not give in.  China's monopoly over rare-earth metals was mentioned.  Metals with magnetic and alloy properties that are essential in smart phones, missiles and fighter jets among other things.

This may backfire.  The response?   A search for alternative sources and plans to build the first rare-earth plants in the US in years.

One stock that benefited in a striking way was Lynas Corp. [ASX:LYC], an Aussie rare-earth miner revealing plans to build a processing plant in Texas.  The stock price jumped 77% in the space of a week.

Our own portfolio holding in Rio Tinto [LSE:RIO] jumped around 6% during this time.  That business has some exposure to rare-earths.  It is currently exploring a lithium deposit in Jadar, Serbia which may contain some of the largest lithium deposits in the world.

Lessons from World War II

We are in increasingly volatile times.  There's a war going on between nationalism v. globalisation.  Protect our own country and industry or embrace free trade?  On both sides there are winners and losers.
That war is currently being fought along trade and immigration tracks.  In Europe, it threatens to pull apart the EU.

A lesson from World War II, is that the markets can spike upward during the darkest days.

After the attack on Pearl Harbour, investors realised the US was mobilizing for war and could win.  The Fed had dropped interest rates to nearly zero.  And a bull market commenced that would carry the Dow up 130% in just four years.

We find ourselves again in a tense world with very low interest rates.  Market opportunities await for the savvy.
Performance update & strategy
May 2019 showed a drawdown of -0.44% for the month across the composite portfolio (total aggregate, weighted return across all significant portfolios following the strategy).  The drawdown occurred mostly toward the end of the month when the US v. China trade war defied signs of resolving, heated up and caused a sell-off of risk assets.

This brings performance since the start of this year to 15.49%.*

Please see our performance chart for more details.
Stock take
Avoiding volatility, Rural Funds Group has been a quiet buy over the last few months. 
Photo source: Kalkine Media

Rural Funds Group [ASX:RFF] is a real estate investment trust (REIT) which owns farmland and leases it to farmers.  Tenants include the likes of Treasury Wine Estate [ASX:TWE] who lease nearly 700 ha (hectares) for vineyards. 

But RFF goes beyond wine assets.  The farms include 4000 ha of almond orchards, 659,000 ha of cattle farms, 17 poultry farms, 7,800 ha of cotton farms and 259 ha of macadamia orchards.

I like the fact they own the farms but then lease the ground to experienced agricultural operators.  The weighted average leases typically range around 9 years.

And this REIT seems to be delivering. 

Average annualised gains have been 30% per year (over the past 5 years).
Dividend yield between 4.42% (current) and 7.84% (in 2015). 

A business based on owning quality, diversified farms that aren't going anywhere, providing food to a hungry world and operated by sensible people.  My kind of investment – and just the sort of quiet achiever that could help with early retirement.

However, farming is not without risks.  Rural Australia can be a brutal environment.  Droughts, storms, pests, frosts and numerous other hard to manage factors can crush farmers.  So there's a degree of tenant risk - plus, RFF has debt to service.

I'm not sure we'd buy it now as the current share price has moved well in excess of asset value. 

But at the right price...
The month ahead
The markets seem skittish again.  Trade war looking to resolve?  They'll go up.  Getting worse?  They'll go down.  Same with Brexit and European concerns over rebel debtor Italy.

But we need the dips to buy and the peaks to profit.  You know what they say about smooth seas.

Simon Angelo
CEO, Vistafolio


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*Past performance is not an indicator for future performance. Your actual portfolio will differ from the composite portfolio mentioned. Annualized returns are after management fees and after withholding taxes. The information contained in this document does not constitute an offer to sell or a solicitation to buy an investment, nor should it be construed as investment advice.  Vistafolio investment services are available to Eligible Investors and Wholesale Investors (not to Retail Investors) as defined in the Financial Markets Conduct Act (2013).
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